Embittered Facebook investors ponder next move

The response from small-time investors to Facebook‘s debut as a public company has been equal parts frustration, confusion and bitterness. Fed up, some are dumping their shares and accepting the losses. Others, while miffed, are holding on and hoping to ride the stock’s eventual success.

Some blame themselves for embracing the hype over a company whose underlying value likely didn’t merit the price at which it went public. But many accuse Facebook and its underwriting banks of setting the price too high and for trying to sell too many shares.

Others are pointing fingers at the Nasdaq stock exchange for botching buy and sell orders on opening day. Or they’re angry over brokers who pushed them to buy.

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And others are irked over reports that Morgan Stanley, which guided Facebook through its public debut, told only some select clients of an analyst’s negative report about Facebook before its stock began trading May 18.

Michael Hines had felt uneasy about Facebook. He thought the shares were priced too high, and the excitement overblown — especially once the company raised its target price for the opening two days beforehand. Yet when the chance arose to buy into the company’s $38-a-share initial public offering, he seized it.

Now, he wishes he’d listened to his misgivings. Instead, Hines watched with dismay as the stock languished on its first day, then slid on its second. On Tuesday, determined to unburden himself of a nagging headache, he sold his shares at $32.76, taking a loss on his investment. He declined to say how many shares he’d bought.

“I was upset with myself for having been drawn into it,” Hines said. “I knew it was grossly overpriced. I could feel it a couple of days before.”

His son, Brad, also bought shares on the first day, at about $40.50, and was also irritated — with himself and with the investment banks that priced the shares.

As the lead underwriter for Facebook’s IPO, Morgan Stanley was expected to set shares at the highest price it thinks the market will bear. But investors have also come to expect that an initial share price will be low enough so the stock can climb on the first day, when interest typically peaks.

“With a good IPO, the investment banks leave room for the pop,” said Hines, a social media consultant. “They didn’t do that in this case.”

U.S. companies that have gone public this year have returned an average of 16 percent on their first day, according to Renaissance Capital. And since going public, those companies are up an average 13 percent.

Looking back, some individual investors say they recognize that Facebook’s initial $38 stock price was too lofty. It was more than 80 times the company’s 2011 earnings per share. The average for companies in the Standard & Poor’s 500 index is far cheaper, about 19 times earnings.

Brad Hines said he was concerned about the price. He admits to “the classic, amateurish mistake.”

“I was so worried about missing out on the big first-day movement,” he said. “Emotions got the better of me.”

Unlike his father, the younger Hines is keeping his shares. He says he might even buy more if the stock keeps falling.

Among those who blame their brokers is Joshua Freeman, who said he bought 200 shares in the IPO after his broker at Morgan Stanley Smith Barney asked if he wanted in.

“For him to call me and solicit me, and then for things to go so spectacularly stupidly, why am I paying him 1 percent of my money under management?” said Freeman, 51, an information technology professional in New York. “If there is any allegiance here, he looks at where his bread and butter comes from, and it’s more on the Morgan Stanley side than the individual investor.”